Bulls gasp for air

Commentary: The market shows its true color is still red

NEW YORK (CBS.MW) -- When you're not sure what to do, go with what you know.

And after nearly three years of declines, investors seem pretty comfortable with selling.

The major market indexes and some high-profile stocks collectively sighed at the open of trading last Thursday, providing a clear sign of what the market's true tendency still is.

That doesn't mean that stocks will continue to decline unabated to new lows. It's just a reminder that when push comes to shove and uncertainty casts a veil over the market, investors would prefer to sell and ask questions later rather than fight the tide and buy.

Richard Dickson, technical analyst at Hilliard Lyons Research, doesn't discount the possibility of a near-term bounce in the market, but sees "no technical evidence" that the market is about to embark on a sustained move higher.

"Rather, the weight of technical evidence at this stage appears to point to lower prices ahead," he wrote in a note to clients.

Identifying the tendency

When people make decisions, they use what they've learned through experience to help guide them. If you know someone well enough, you can predict how they will act in certain situations.

The same goes for the market. The difference is, there are many more factors that influence the market -- millions of players and thousands of companies, economic and political news and other asset markets, in the U.S. and abroad -- than those that influence your brother or sister.

What many refer to as "technical analysts" can't possibly analyze all the data available, much less that which is unavailable. Instead, they study how the market reacts to news rather than the news itself to try to find a pattern in the apparent chaos because investors are concerned about making money, not with being right about the news.

Charts, therefore, are more than lines drawn on a two-dimensional piece of paper, and "technicals" are more than an arbitrary calculation of historical data. They are clues that, if deciphered correctly, can give an investor more than a punchers chance at making money.

'Gaps' provide a clue

One of the most-easily spotted technical patterns is the "gap," which is the opening in a chart created by the failure of a day's intraday high (or low) to overlap the previous day's low (or high).

Gaps imply dominance by one side, and expose the other side's tendency to panic. They also provide resistance (or support) for the market, as investors left abandoned scramble to escape relatively unscathed.

By themselves, gaps don't say much. You'll notice that most charts are littered with downside, as well as upside gaps. What matters is where and in what context they occur. And if there is a pattern.

Running for their lives

Two weeks earlier, the major market indexes abandoned uptrends that began in late-July/early-August (see previous column). A few day's after the break, they all took dives of four or more percent (see Market Snapshot).

As the points of the broken uptrends were approached last Wednesday in an attempt by bulls to regain lost momentum, the indexes suddenly reversed course.

At their intraday highs, the Diamonds were up 1.7 percent, the Qs were up 3 percent and the Spiders were 1.8 percent on Wednesday, but all finished the session in negative territory (see Market Snapshot). It's not surprising then that fears of another failure by the bulls led to Thursday's downside gaps.

It's not so much that the indexes declined on those days, it's the manner in which they fell. The depth and speed of the sell-offs suggests investors are still quick to abandon long positions at the first sign of trouble.

No one runs faster or farther than a person who is running for his or her life.

A loser's identity

Money only cares that it grows or it doesn't; it doesn't care about why (see previous column). If there is any question, it goes with what it knows. And recent market activity suggests self-preservation, rather than greed, is still the predominant emotional driver in times of uncertainty.

Given that there is any firm fundamental or technical reason to the contrary, the market will continue to identify with the bear that has dominated trading over the past three years.

"Consequently, chasing stocks into rallies at this point would probably be a bad idea," said Hilliard Lyons' Dickson.

Instead, he suggests using strength to raise cash or hedge existing long positions.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.